Risk Management Watch: Spending on Regulatory Compliance, Risk Management to Rise
Banks have been paying the price for lax risk controls. Losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types, according to Bloomberg. The report states that writedowns and credit losses at more than 100 of the world’s biggest banks and securities firms rose after UBS AG reported second-quarter earnings, which included $6 billion of charges on subprime-related assets. Merrill Lynch and Wachovia are two more banks who had billion-dollar writedowns in the second quarter. Back in April, the International Monetary Fund estimated banks’ losses to reach $510 billion, about half its forecast of $1 trillion for all companies. Since then, Bloomberg says New York University economist, Nouriel Roubini, expects losses to hit $2 trillion. Bloomberg quotes Makeem Asif, Analyst at KBC Financial Products in London, as saying, “It just keeps spreading from one asset to another, so it’s hard to know when these writedowns will stop.”
Amid the mounting losses, banks have come under increasing pressure to provide a clearer picture of their overall risk. Private equity firms are no different, according to the FT. Regulators have started to require detailed information on banks’ risk – not just within the individual components of their businesses, but across their entire institutions. The report states that Carlyle Group and Kennet Partners are “betting that specialists in regulatory and risk management stand to gain.”
Brussels-based FRSGlobal, (which helps banking clients like Citigroup, JPMorgan and HSBC, meet regulators’ financial disclosure demands) has agreed to buy Iris, a small risk management firm, to add risk-assessment capabilities to its business, reports the FT. FRS, which is 70% owned by Carlyle and 30% owned by Kennet, has enjoyed double digit growth in annual profits in the two years the firms have owned it. The FT quotes Fernando Chueca, an Associate Director at Carlyle, as saying, “Regulators are increasingly asking banks to demonstrate that the risk management solutions they use are sound. Banks are now realizing the ’silo approach’ isn’t working.”
Federal Reserve Vice Chairman, Donald L. Kohn, in prepared testimony at a recent Senate Banking Committee hearing, said primary dealers have “learned some valuable lessons from the events of the recent financial turmoil that should translate into better risk management.” At the hearing, both Kohn and Scott Polakoff, Deputy Director of the Office of Thrift Supervision (OTS), also stressed the importance of a broad, enterprise-wide, top-down view of risk management. Their words underscore changes already taking place in a number of boardrooms.
Right now, corporate boards continue to face unparalleled levels of business complexity, economic uncertainty, a changing political landscape, new regulations and mounting shareholder demands. As a result, business leaders are gravitating towards enterprise risk management in assessing a firm’s strategic objectives and associated risks. Executive search firm, A.E. Feldman, reports that risk management jobs are gaining significance as firms continue to shore up their risk teams and replace or add new Chief Risk Officers, which report directly to the CEO.
Most recently, XL Capital Ltd announced it has appointed Jacob D. Rosengarten as Executive Vice President and Chief Enterprise Risk Officer of the XL group of companies. According to the company, in his new role at XL, Rosengarten will be responsible for ensuring the efficient identification, assessment, monitoring, and reporting of key risks across the XL group. He will report directly to XL’s Chief Executive Officer Michael S. McGavick, will chair XL’s Enterprise Risk Committee which is comprised of the Company’s top risk management professionals, and will provide information to XL’s Board of Directors and executive management with respect to enterprise risk management policies and procedures.
Commenting on Mr. Rosengarten’s appointment, XL’s CEO McGavick contends that risk remains a key area of his focus. “This appointment demonstrates XL’s commitment to excellence in enterprise risk management,” he says.
The FT also notes that spending on regulatory compliance and risk management (which could help prevent future losses) is likely to increase - especially if regulators continue to ask banks for more risk analysis and evidence of risk controls.
To learn more or inquire about job trends in risk management the lines of communication are open. Contact the Mitch Feldman, President of A.E. Feldman, and the firm’s executive recruiting team here.
